Anti-Fraud Collaboration encourages reporting on financial misconduct

The Anti-Fraud Collaboration, a joint effort of the Center for Audit Quality, Financial Executives International, the Institute of Internal Auditors and the National Association of Corporate Directors, has released a new report urging accountants, auditors and other business people to blow the whistle on any financial reporting shenanigans they see.

The Collaboration held a series of roundtable discussions on suspected financial reporting fraud and the negative impact that fear of retaliation can have on uncovering the fraud. In the report, “Encouraging the Reporting of Misconduct,” the Collaboration provides suggestions on how to overcome those obstacles to create a retaliation-free environment.

“Our hope is that the outcome of the roundtable discussions and report will serve as a catalyst for continued dialogue among financial reporting supply-chain participants, the investing public, and other interested parties,” said CAQ Executive Director Cindy Fornelli in a statement. “Those who observe misconduct should be encouraged to report their observations, and we hope that the report will provide concrete ways companies can provide a safe environment for them to do so.”

The report cites a recent survey from the Ethics & Compliance Initiative that found 22 percent of global workers reported pressure to compromise their standards. Approximately one-third of respondents globally reported they observed alleged misconduct, and 76 percent of survey respondents in the United States who observed alleged misconduct reported it—17 percent higher than the global median—but nearly a quarter of them did not. Fifty-three percent of those in the U.S. who reported misconduct experienced retaliation, also 17 percent higher than the global median.

“No organization is immune to the risk of financial reporting fraud, but all companies can take necessary steps to mitigate such fraud, including encouraging employees to report misconduct, identifying the delinquency earlier in the process, and maintaining the integrity of financial reporting going forward,” said IIA president and CEO Richard Chambers.

The report cited further findings from another ECI survey indicating 41 percent of U.S. workers said they have observed misconduct in the workplace. One-third indicated the rule-breaking they saw represented a one-time incident, while two-thirds indicated the misconduct occurred more frequently. More than one-quarter (26 percent) of observed misconduct represents an ongoing pattern of behavior. Forty-one percent of the respondents said the behavior has been repeated at least a second time. Workers reported that 60 percent of misconduct involved someone with managerial authority from the supervisory level up to top management. Retaliation against workers who reported wrongdoing continues to be a widespread problem. One in five workers (21 percent) who reported misconduct said they suffered from retribution as a result. Retaliation has not always been so widespread. The rate was only 12 percent in 2007, the first time it was measured in the survey. Among non-reporters, 53 percent cited fear or knowledge of retaliation as their reason for not reporting the misconduct.

“Next to preventive measures, the best defensive tools leadership has to mitigate damage related to financial misconduct are the eyes and ears of their teams,” said FEI president and CEO Andrej Suskavcevic in a statement. “Establishing a corporate culture that respectfully embraces the reporting of perceived misconduct, together with proper and clearly communicated investigative procedures, can dramatically affect the willingness of staff to participate. Our research aims to help leadership meet those goals.”

Financial Executives International president and CEO Andrej Suskavcevic
Courtesy of FEI

GRC is relevant for organizations across the spectrum, from Fortune 100 multinationals to fast-growing companies aiming for international expansion, an IPO or a buyout. The traditional approach of managing risk in silos across different functions—internal audit, internal controls and compliance— and reacting to risks as they occur puts many companies at a disadvantage. Today’s environment demands a more agile and innovative approach to GRC.